Friday, February 13, 2015

FYI: WA Sup Ct Rules Guarantor Not Protected From Deficiency Judgments Following Nonjudicial Foreclosure of Property Not Owned By Guarantor

The Supreme Court of the State of Washington recently concluded that, under Washington’s Deed of Trust Act (“WDTA”), guarantors of commercial loans whose own property has not been foreclosed are not protected from deficiency judgments after the borrower’s property has been nonjudicially foreclosed.

Under the WDTA, a lender has the option of pursuing a judicial or nonjudicial foreclosure. Subject to a few exceptions, however, if the lender pursues a nonjudicial foreclosure, the lender’s recovery is limited to what is recouped from the foreclosure.

This case is a consolidation of two different cases with nearly identical facts. In both cases, unrelated limited liability companies borrowed money from the same bank. The loans were secured with deeds of trust encumbering property of the LLCs. In addition, individuals affiliated with the LLCs guaranteed the loans but did not grant a separate deed of trust to secure the guaranty.

Subsequently, the FDIC assigned the bank’s interest in the loans, the deeds of trust and the guaranties to a new bank. The new bank initiated nonjudicial foreclosure proceedings and had the properties sold by a trustee. The new bank was the successful purchaser at the sales and then sought the deficiency amount from the individual guarantors. The trial court granted the individuals’ motions for summary judgment, but the Court of Appeals reversed.

The Washington Supreme Court held that the WDTA did not protect the guarantors from deficiency judgments because the guarantors had not secured their guaranties by granting deeds of trust and, even if they had, the foreclosed properties were not properties of the guarantors.

The Washington Supreme Court carefully analyzed the language of the WDTA to conclude that the exceptions to the WDTA that protect against deficiency judgments did not apply to the personal guarantors in these cases. Under the WDTA, “a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee’s sale under that deed of trust.” RCW 61.24.100(1).

The Court interpreted the exceptions contained in the WDTA to conclude “the [W]DTA extends protection from deficiency judgments – with some exceptions – to a guarantor who grants a deed of trust to secure its guaranty of a commercial loan when the property burdened by the guarantor’s deed of trust is nonjudicially foreclosed.”

The Court further held that “a guarantor of a commercial loan must secure its guaranty by granting a deed of trust in order to be protected from deficiency judgments when the property burdened by its deed of trust is nonjudicially foreclosed.”

The Court held that the guarantors were not protected from deficiency judgments under the WDTA for two reasons: they did not secure their guaranties by granting deeds of trust, and the foreclosed properties were not the properties of the guarantors, but instead the properties of the LLCs that had granted deeds of trusts.

Because the guarantors were not protected from deficiency judgments, the Washington Supreme Court concluded that the new bank could seek deficiency judgments against the guarantors.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.